Last Week
Strong earnings reports, tame inflation data, and optimism over trade relations with China combined to drive the stock market to a new record high. Investors remained unconcerned about the spike in oil prices or the government shutdown, which reached its 24th day without any signs of progress in the negotiations.
Starting with earnings, positive EPS surprises reported by companies in the Financials, Information Technology, and Industrials sectors led to an overall earnings growth rate of 9.2% today, compared to an earnings growth rate of 7.8% the previous week. If 9.2% is the actual growth rate for the quarter, it will mark the ninth consecutive quarter of year-over-year earnings growth for the index. Earnings results are exceeding expectations in 87% of the reports, the largest percentage since Q2 2021 (also 87%). The trailing 12-month P/E ratio is 28.8, above the 5-year average of 25.0 and above the 10-year average of 22.8. Whereas that valuation seems very elevated, it could be reasonable, as stock prices are primarily a function of earnings and interest rates. Earnings have grown rapidly, and interest rates have been stable and trending lower. For the entire week, the yield on the 10-year Treasury held stable at 4%. An overly simplistic calculation on the S&P, plugging in 8% as a discount rate (4% risk-free plus 4% risk premium) and 5% as a growth rate on the current earnings base, suggests a “fair value” of 9,380 for the index versus its current 6,791 level.
The economic data shows that the week’s main event was Friday’s long-awaited consumer price index (CPI) report for September. Both the headline and core CPI came in at a 3% year-over-year increase, slightly lower than the consensus estimates from economists, with the latter rising at its slowest pace since June. The CPI print reinforced expectations that the Federal Reserve would cut interest rates by 25 basis points at next week’s monetary policy committee meeting. Remember, “Don’t fight the Fed” has been a time-proven investment principle.
The Trade Teeter Totter Tweets were, on balance, positive. However, Trump suspended talks with Canada because he didn’t appreciate some of the anti-tariff commercials that our neighbors to the north were airing. More significantly, the meeting between President Donald Trump and China’s Xi Jinping was confirmed. The two leaders will meet during Trump’s upcoming visit to Asia, hoping to ease tensions between the world’s two largest economies.
The number of advancing issues almost tripled the declining issues, with the Technology, Industrials, and Oil & Gas sectors at the top of the charts. Crude Oil surged 7% after President Trump announced added restrictions on Russian oil. The Dollar moved marginally higher, while Gold dropped 6.4% on Tuesday after closing at a record high on Monday.
On the Chicago Sports Scene, the Chicago Bears lost to the Baltimore Ravens 30-16, the Chicago Fire FC was eliminated from the MLS Cup playoffs by the Philadelphia Union in a penalty shootout, and the Blackhawks lost to the Winnipeg Jets 3-1. The only victory came from the Chicago Bulls, who beat the Orlando Magic 110-98 to start the season 2-0.
This Week
It’s the busiest week of earnings season, with 175 S&P 500 companies scheduled to report results for the third quarter.
All eyes will be on the Federal Reserve on Wednesday when it will announce its monetary policy decision, with near certainty of reducing the federal funds rate by 25 basis points.
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